Endowments 101

Private school endowments have caught the attention of much of the nation during the pandemic, and we felt it might be helpful to explain what endowments are, how they work, how they ensure a vibrant future for their institutions, and why they can’t be used to overcome short-term budget shortfalls.

WHAT IS AN ENDOWMENT?

An endowment is:

  • A charitable fund that offers a source of stability for institutions.
  • Critical to the financial health of schools.
  • Essential to support institutions as they work to offer high-quality and accessible education.
  • A compilation of funds given by many donors over time for specific purposes that cannot always be changed after the gift is made.

HOW DOES MICDS’ ENDOWMENT WORK?

MICDS receives donations to its endowment as well as returns on its endowment investments each year. Those returns are generally spent at an approximate rate of 4.5% each fiscal year to meet current teaching, learning, and operational needs. Any remaining investment returns are generally reinvested into the existing endowment.

HOW WAS MICDS’ ENDOWMENT CREATED?

MICDS’ endowment is a collection of hundreds of separate funds, set up through the generous charitable gifts of our donors. Our Development team works closely with donors to identify initiatives, projects, or programs of mutual interest that can then be set up as endowed funds. At MICDS, for instance, we have endowed funds for teachers in specific disciplines such as History or Mathematics or for employees pursuing topical professional development.

IF THERE IS A SIGNIFICANT AMOUNT IN AN ENDOWMENT, WHY CAN’T IT BE USED TO HELP THE SCHOOL IN TIMES OF CRISIS?

Endowed funds are intended to provide stable, long-term funding to an institution while balancing the present and future needs of the School and its students, a concept known as intergenerational equity. Most of these endowed funds are established as “restricted” funds that can only be spent in specific situations or under certain conditions. The School is not at liberty to use these funds in ways not covered by the donor agreement. For example, a fund restricted to faculty professional development cannot be used to pay annual faculty salaries or provide financial aid.

WHY ISN’T MICDS USING ITS ENDOWMENT TO PLUG BUDGET GAPS?

Endowments are not rainy day funds or reserves, nor are they a checking account. Donors typically restrict endowed gifts for specific educational purposes: creating scholarships, supporting professional development, endowing a “chair” position, starting new programs, or maintaining new facilities. Legal agreements established when endowed gifts are made prohibit using these funds for other purposes. A recent study conducted by the Council for the Advancement and Support of Education (CASE) found that 85 percent of new gifts to endowments at schools were restricted for specific purposes. Institutions are legally bound to uphold these restrictions and cannot redirect endowed funds to close budget gaps.

WHAT HAPPENS TO ENDOWMENTS DURING A PANDEMIC OR ECONOMIC CRISIS?

Endowments are built for longevity but are also vulnerable to market risks. During the Great Recession, endowments lost an average of 18.7 percent in 2008-09. Because most schools calculate their annual spending rate on a rolling average or similar formula, endowment spending typically remains stable in the short-term. However, since they are obligated by donors and law to ensure endowed funds meet current and future needs, institutions often must adjust
the amount of their spending distributions if a downturn persists.

For more information, contact Amy McFarland Dove ’85, Director of Development, at adove@micds.org.